Senator calls for curbs on real estate affiliated business arrangements

April 21, 2005

Bill would limit title insurers' affiliated referrals to 60%

Inman News

The Colorado state legislature is currently considering a bill that would limit affiliated business arrangements among real estate service providers.

Sen. Dan Grossman (D-Colo.) is sponsoring the legislation, currently under consideration by the Business, Labor and Technology Committee of Colorado's Senate. Affiliated business arrangements, or ABAs for short, are partnerships between real estate entities such as title insurance companies, mortgage lenders and real estate brokers.

The bill would prohibit title insurance agents and companies from earning more than 60 percent of their business from affiliated business referrals. Title companies also would have to file annual reports confirming the amount of business generated by ABAs.

ABAs, which are possible under the Real Estate Settlement Procedures Act as long as certain guidelines are followed, have come under increased scrutiny in the wake of investigations into title insurance industry referral practices.

Colorado's deputy insurance commissioner Erin Toll is investigating ABAs in her role with the National Association of Insurance Commissioners.

In a typical ABA arrangement, a real estate brokerage sets up a joint venture with a mortgage lender or title insurer, for example. The partnership typically provides an in-house, one-stop shopping experience for the home buyer or seller, offering brokerage, lending and even closing services under one roof.

Sen. Grossman, the bill's author, has said that consumers should have more options in purchasing services when they buy and sell their homes.

"Is it good or bad? I don't know. They (clients) probably get just as good service with ABAs," said Anne Biddell, a Hayward, Calif., Realtor with 20 years' experience. "As long as I've been in the business I've seen affiliates and Realtors working under the same corporate ownership."

Biddell acknowledged that one of the reasons she is at Realty World Neighbors is because "it's not a big corporation and we make our own decisions here."

In Biddell's opinion, "there should be at least three recommendations to mortgage companies. If you get into a house and you come back and say, 'Anne, you told me I had to use XYZ Mortgage Company and now I find out I could have saved money by going directly to another company,' that's not good."

"In this office we encourage people to shop around and we give lists of companies we find reputable," Biddell said.

ABAs are becoming more popular in the industry – the April Real Estate Services Providers Council conference focused on such agreements. But some critics feel that the arrangements discourage competition and should be more open.

"I think overall, title companies are regulated pretty well. But some of the smaller ones are taking liberties with RESPA and that needs to be stopped," said Rich Klatt, managing broker of Sterling Real Estate Group in Lakewood, Colo. In that capacity, Klatt felt Grossman's bill could be useful.

Limiting title insurance companies from deriving more than 60 percent of income from one source "is fair. That would show they are out there competing with everyone else and not just being rewarded for having a relationship," Klatt said.